Were still arguing about it but the culprits likely were: Underinvestment, underconsumption, monetary policy and trade wars.

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Presentation on theme: "Were still arguing about it but the culprits likely were: Underinvestment, underconsumption, monetary policy and trade wars."— Presentation transcript:

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Were still arguing about it but the culprits likely were: Underinvestment, underconsumption, monetary policy and trade wars

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Industrial productivity led to higher corporate profits These profits led to more investment, higher wages Higher wages led to the creation of a large middle class This middle class bought new products like cars and personal appliances

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Not all segments of the economy boomed (farming stagnated) The relationship between money, the economy and unemployment was poorly understood The government did not protect bank deposits or regulate how the banks loaned money

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By the mid-20s the stock market was booming Investors were borrowing money from banks to buy stock – this is called buying on margin If banks felt that a loan to buy stock was going to lose money, they could force the borrower to pay it back at once – called a margin call Banks began to loan more and more money into the stock market – leading to underinvestment in manufacturing, farming etc...

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In the 1920s investors speculated in overvalued stocks. They bought stocks on margin, putting down as little as 5 percent and borrowing the rest from brokers. Brokers financed the loans by borrowing from banks, who in turn borrowed from the savings of depositors. When the market became saturated, some brokers began to sell their stocks, which led to a decline in prices. Other brokers called in their margins, which many investors could not cover. Brokers started selling stocks in larger quantities, forcing down prices even more.

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The ensuing panic caused the bottom to fall out of the market. Brokers failed to repay their loans to banks, and millions of people saw their savings vanish from the banks that had made the loans. As the new decade opened, unemployment rose and the United States fell into a deep economic depression that spread to almost every nation.

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Money that could have been invested into factories, farms and new technology was instead invested speculative stocks People who didnt play the market still found their live savings destroyed – they could neither invest nor consume

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As unemployment spread, workers had less money to spend on appliances or new products Rural workers who hadnt been doing that well during the 1920s were still unable to afford many goods

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Hoover wanted to discourage the speculative borrowing that had caused the crash so he raised interest rates = less borrowing = less investment = less jobs As income taxes declined because of unemployment, Hoover raised taxes – worsening unemployment By 1933, unemployment was near 25 percent

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In a desire to protect American jobs from foreign competition, the US Congress raised tariffs on 20,000 goods with the Smoot-Hawley Tariff Act After this act, US exports and imports declined by half